How to invest in commodity-based securities

When investors mention commodity-based securities, what they really mean is this: getting exposure to oil, gold, wheat, or cattle without having to store a single barrel, bar, or bushel. No warehouses. No silos. No insurance headaches.

In this setting, a “security” is simply a financial instrument whose value moves with a commodity or a group of commodities. That could be a futures contract traded on an exchange. It might be a share in an ETF that holds futures or physical metal. It could be a bank-issued note tied to a commodity index. Or it may be stock in a mining or energy company whose profits rise and fall with commodity prices.

Different wrapper, same core idea: you’re buying price exposure, not the physical stuff.

For someone with basic market knowledge, the appeal is obvious. Commodities can hedge inflation, express macro views, and add a different return stream to an equity and bond portfolio. The practical question is which type of security to use. The answer changes a lot depending on whether you want short term trading exposure, a medium term hedge, or a long term allocation.

The sections that follow take it step by step. We start with futures, then move through funds, structured notes, and commodity-linked equities.

The emphasis stays practical. What do you actually own—or what are you being promised? How does the instrument behave when markets spike, stall, or slide? Where does it realistically fit in a portfolio? And just as important, what tends to break in live trading—the stuff that doesn’t show up in glossy marketing decks.

The aim isn’t theory. It’s understanding how these tools perform when real money is on the line.

This article focused on investing in commodities. Most investors are better off sticking to stocks. Stocks are easier to understand than most of the instruments used to trade commodities. You can learn more about investing in stocks by visiting the website Investing.

Futures and options on futures: classic exchange-traded exposure

Commodity futures are the original listed commodity exposure. A futures contract is an agreement to buy or sell a set quantity of a commodity at a set price on a set date. On a practical trading account, you never see the warehouse. You see a margin requirement, daily profit and loss, and an expiry date where you either close or roll the position.

If you buy a crude oil futures contract, you are long one standard unit of oil at the contract price. As the market price moves, your account is marked up or down every day through variation margin. Hold the contract into expiry and, depending on the contract design, you either face physical delivery rules or you are cash settled. Most financial traders close or roll long before that.

Futures give very direct price exposure and are capital-efficient because of margin. That is why active commodity traders and many hedgers use them. The flip side is that margin cuts both ways. A move against you can trigger margin calls and forced reduction at bad prices if you over-size positions.

Options on commodity futures add a second layer. A call option on a gold future gives you the right, but not the obligation, to go long the future at a preset strike before or at expiry. A put gives you the right to go short. Options are themselves securities whose value depends on the price, volatility and time to expiry of the underlying futures.

Day traders and short-term swing traders often gravitate toward futures and options for one simple reason: liquidity. Major contracts like crude oil, natural gas, gold, silver, copper, corn, soybeans, and broad commodity index futures tend to have tight spreads and heavy daily volume. That combination makes it easier to get in and out without giving up too much to slippage.

For active traders, that matters. When you’re holding positions for hours or days—not months—you need markets that move cleanly and fill orders fast. Futures and listed options in these flagship contracts usually provide that depth, along with transparent pricing and centralized clearing.

From an investing angle, futures are also the machinery behind many commodity indices that roll positions from one contract month to the next. When you buy a commodity index product, it is usually a wrapper around a rolling futures strategy rather than a pile of physical assets.

The main catch for a basic investor is that futures are short dated. Exposure has to be rolled, which introduces an extra source of gain or loss through the term structure of prices.

Exchange-traded products: commodity ETFs, ETCs and ETNs

Exchange-traded products sit between raw derivatives and direct holdings. They wrap commodity exposure in a share-like instrument that trades on stock exchanges, which is easier for many investors to handle and can drop into normal brokerage accounts.

One group of products physically hold the commodity. Gold and silver funds that store bullion in vaults and issue shares against that stock are the main example. Each share represents a claim on a small slice of the metal. Prices track spot metal prices quite closely, net of fees and small frictions. For investors who want long term exposure to gold or silver without worrying about futures and roll schedules, this structure is common.

Another large group holds commodity futures rather than physical. An oil ETF might hold crude oil futures with staggered maturities, rolling them as expiry approaches. A broad commodity fund might hold a basket of energy, metal and agricultural futures in weights that follow an index.

These funds give you spot-like exposure at share level but can drift away from the spot path over time because of roll yield. When the futures curve is above spot and slopes downward (backwardation), rolling can add return. When the curve slopes upward (contango) and far months are pricier, rolling can subtract return. Many investors only notice this after a few years when they see that the fund has lagged or beaten spot prices despite simple day-to-day tracking.

Exchange-traded notes add a different structure. An ETN is an unsecured debt instrument issued by a bank or similar institution. It promises a return that follows a commodity index, after fees. The issuing bank does not have to hold the underlying futures in a fixed way, although in practise it usually hedges some of its risk. The main extra risk for the holder is credit risk of the issuer. If the bank fails, ETN holders are creditors, not owners of any assets.

Exchange-traded products are the usual entry point for investors who want commodity exposure in a familiar vehicle. They trade like equities, settle in the same account and can be combined easily with other holdings. The trade off is control. You do not choose the exact futures, roll rules or storage arrangements; you accept the fund’s design and fee schedule.

Commodity-linked notes and structured products

Commodity-linked notes are another way to package exposure, often sold by banks and brokers as short or medium term investments. They are debt obligations where the payoff at maturity depends on the performance of a commodity or commodity index, sometimes with caps, floors or leverage built into the formula.

A simple example is a three year note that pays back your capital plus any positive performance of a commodity index, up to a cap, with no participation in losses as long as the issuer stays solvent. More complex versions can include knock-in or knock-out barriers, where payoff depends on whether the commodity has breached certain levels during the life of the note.

Structured products like this can be engineered to meet a precise payoff pattern for a client, such as capital protection with some commodity upside, or enhanced income with conditional downside. Internally, the bank uses combinations of options and futures to hedge its obligations.

From the investor’s side, these notes are convenient if you want a defined payoff and do not wish to manage futures or options yourself. They are usually not traded on exchange in size; liquidity is provided by the issuer. That creates dependence on the issuer for pricing and secondary market access, and introduces issuer credit risk.

The other issue is transparency. The term sheet gives you a payoff formula, but fees and hedging costs are baked into that formula. Analysing whether the note is good value relative to doing something similar yourself with futures and options requires option pricing skills that many retail investors do not have.

Commodity-linked notes sit more naturally in wealth management portfolios than in active trading accounts. They are a way to add commodity flavour with controlled payoffs rather than a tool for short term directional trades.

Equities of commodity producers, MLPs and royalty-style vehicles

Owning shares in companies that produce, transport or process commodities is another type of commodity-based security. Here you get indirect exposure through the earnings and cashflows of businesses that sit on top of the commodity supply chain.

A copper miner’s profits depend heavily on the copper price, but also on its cost base, reserves, management decisions, hedging policy and capital structure. An integrated oil company’s performance depends on crude prices, refining margins, downstream marketing, and political risk in the countries where it operates. A fertiliser producer’s fortunes link to natural gas prices and agricultural cycles.

These equities are often more volatile than the broad equity market and tend to move with relevant commodity prices over time, but they are not one-for-one trackers. In some periods producer shares lag the underlying commodity because of cost overruns, poor investment decisions or regulatory shocks. In other periods they outperform because of operating leverage and expansion.

Master limited partnerships in energy infrastructure and royalty trusts in energy or mining add another flavour. They are vehicles that own assets such as pipelines, storage, or mineral rights and distribute a large share of cashflow to unitholders. Their payouts depend on throughput volumes and commodity price levels. For investors looking for income linked to commodity activity, these structures can be attractive, although they come with their own tax and governance complications.

From a portfolio view, producer equities and similar vehicles behave somewhere between pure commodity exposure and normal sector exposure. They add both commodity beta and equity beta. That can be a feature if you want higher sensitivity and potential income, but it also means these holdings respond to equity market shocks in ways that a pure futures or physical position might not.

Assessing these securities requires normal fundamental analysis plus a view on commodity price paths. You need to look at balance sheets, costs, reserve life, capital allocation and political risk, not just a chart of the commodity.

Swaps and other OTC instruments tied to commodities

Outside listed futures and exchange-traded products sits the over-the-counter market. For large institutions and corporates, commodity swaps and forwards are common tools. For most basic investors they remain in the background, but they still matter because they often sit inside structured products and fund hedges.

A commodity swap is a contract where two parties exchange cashflows based on a commodity price. A simple example is a fixed-for-floating swap where one party pays a fixed price per unit and receives the floating spot or index price. This can hedge price risk for a producer or consumer. The bank on the other side manages its own risk through futures or other swaps.

Some funds and notes use total return swaps on commodity indices to get exposure without holding futures directly, especially in jurisdictions where future access is more restricted. In that case the fund pays a financing rate and receives the index return from a dealer, backed by collateral.

These OTC instruments allow fine tuning, such as exposure to custom baskets or non-standard maturities. They also bring bilateral counterparty risk and more complex documentation. For individuals, direct use is rare outside professional settings, but understanding that swaps sit under many commodity-linked securities helps when you read fund documents.

Matching security type to objectives: hedge, macro view, inflation, yield

Once you understand the menu, the next step is matching the security type to what you actually want to do.

If you want short term, high sensitivity exposure to a single commodity price, futures and options tend to be the most direct tools. You can adjust size, control entry and exit precisely, and design your own risk profile. That suits traders with the time and temperament for active management and a comfort with margin and daily marking to market.

If your aim is a medium or long term allocation to a commodity or basket as an inflation hedge or diversifier, exchange-traded funds that hold physical metal or well-designed futures baskets are more practical. They sit in normal brokerage accounts, have no margin calls, and can be acquired and held with simple cash transactions.

For investors who care about capital protection or shaped payoffs, commodity-linked notes and structured products hang different return patterns around the same underlying prices. These are more a fit for investors who work with private banks or advisors and are willing to accept issuer risk and reduced liquidity in exchange for payoff features.

Investors who want to combine commodity exposure with income or who believe they can pick strong operators might favour producer equities, MLPs or royalty vehicles. These let you express both a view on commodity prices and on management quality, with potential dividends or distributions. They also plug naturally into equity portfolios and factor frameworks.

Swap-based exposure, whether through funds or notes, often comes into play when futures access is complicated or where the wrapper uses swaps for operational reasons. As a basic investor you mostly meet swaps inside other products rather than trading them directly.

The key is to be clear about horizon, desired sensitivity, and your tolerance for margin, credit risk and complexity. That shapes whether you sit closer to the derivative end of the spectrum or the equity and fund end.

Risks that matter across the menu: roll, tracking, margin, tax and rules

Commodity-based securities add a cluster of risks on top of the usual market price swings. Knowing the main ones makes it easier to pick and size positions sensibly.

Roll risk appears whenever a strategy relies on futures. Contracts expire, so long term exposure means selling the near contract and buying a later one. If the curve slopes upward, the later contract is more expensive, and rolling imposes a cost known as negative roll yield. This can drag returns even if spot prices drift sideways or up slowly. The reverse is true in backwardation, where rolling can add return. Commodity index funds disclose their roll rules, but many investors only discover the impact after a few years when performance diverges from spot charts.

Tracking error is the gap between the security’s return and the underlying commodity or index. Physically backed products tend to track closely after fees, but futures-based funds, ETNs and notes can drift. Causes include roll yield, collateral returns on cash held inside the fund, and hedging costs. For leveraged and inverse commodity funds, compounding and daily rebalancing can create very large deviations over longer periods. These vehicles are usually designed for short term trading, not for buy-and-hold allocations.

Margin risk is specific to futures and options. Because you post only part of the contract value, a relatively small adverse move can wipe out margin if positions are sized aggressively. Exchanges and brokers can also raise margin requirements quickly during stress, forcing you to reduce exposure at bad levels if you lack spare cash.

Credit and counterparty risk shows up in ETNs, structured notes and swaps. In an ETN you are a creditor of the issuing bank. In a note or swap you depend on the other side meeting its obligations over the life of the contract. During quiet times this feels abstract. During a credit event it becomes very real, as seen in past episodes where ETN prices detached from index values because of worries over issuers.

Regulatory and policy risk can hit commodity securities through position limits, changes in margin rules, tax adjustments or trading restrictions. Authorities have, at various points, restricted position sizes in some agricultural futures to reduce squeezes, or tightened rules on retail access to complex leveraged products. Tax treatment of commodity ETFs and partnership structures also varies by jurisdiction and can change over time.

Tax is a quieter but persistent factor. Some commodity funds generate income that is treated as ordinary income rather than capital gains. Futures can be taxed under blended rules. MLPs and royalty trusts often produce K-1s or equivalent forms and can trigger tax complications across borders. The after tax return can look quite different from the pre tax index chart.

Liquidity risk varies by contract and product. Major crude, gold and broad commodity futures tend to be very liquid; minor agricultural or metal contracts can be thin. On the fund side, some commodity ETFs are thinly traded with wide bid-ask spreads. Structured notes may have only one real market maker: the issuer.

All of this argues for reading prospectuses and contract specs more carefully than usual. With commodities, the path of returns depends not just on spot prices but also on curve shape, fund design and tax and rule settings sitting in the background.

Building a sensible commodity sleeve with securities

Investing in commodity-based securities is less about finding a magic product and more about picking the right tool for the job. The underlying theme is the same across them all: you want some link between your portfolio and the prices of energy, metals or agricultural goods, for reasons that range from short term trading to long term inflation protection.

Futures and options give the cleanest link for traders and sophisticated hedgers, at the cost of margin management and roll work. Exchange-traded funds and related products give a simpler entry point for investors who just want exposure in a brokerage account. Producer equities and income vehicles add both commodity and business risk, plus potential dividends. Notes, ETNs and swaps add more structure and, with that, more credit and design risk.

For an investor with basic knowledge, a practical starting point is usually a modest allocation through one or two well-established exchange-traded products in areas like gold and broad commodity indices, followed by producer equities where you already understand the sector. From there, if you find you need finer control or shorter horizons, derivatives and more complex structures are always available.

The main discipline is to keep the focus on how each security actually makes or loses money, not just on the name on the factsheet. Commodities themselves are volatile enough; there is no need to add extra surprises by buying structures you do not fully recognise.

This article was last updated on: February 17, 2026